The Tax Court decided a case of first impression, Corbalis v Comm’r, 142 TC No. 2. The main issue decided on summary judgment was whether the court review provisions of section 6404(h) apply to denials of interest suspension under section 6404(g). IRS had taken the position that the court review provisions of 6404(h) applied only to final determinations relating to 6404(e), dealing with abatement claims running from IRS ministerial or managerial mistakes. The Tax Court held that it does have jurisdiction to review an IRS determination that the suspension period does not apply. The case is also interesting procedurally because it makes the important point that IRS revenue procedures, especially when unaccompanied by persuasive reasoning, are entitled to no judicial deference.

I will provide some background for the dispute and summarize the main points.

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It is difficult to get IRS to abate interest. Section 6404(e) and (g) provide two avenues for taxpayers to argue interest should not apply. Section 6404(e) relates to delays stemming from ministerial or managerial acts. There are regulations applying Section 6404(e) and a number of Tax Court cases considering whether delays constitute managerial or ministerial acts.

Section 6404(g) is a less well-known provision. Part of RRA 98, it generally provides that interest does not run if the Service fails to contact the taxpayer within the close of the 36-month period beginning on the later of (i) the date on which the return is filed; or (ii) the due date of the return without regard to extensions. Originally, the provision had more bite because Congress provided for an 18-month period, but it is still on the books.

The Tax Court has exclusive jurisdiction under Section 6404(h) to review a claim that “failure to abate interest under this section was an abuse of discretion, and may order an abatement, if such action is brought within 180 days after the date of the mailing of the Secretary’s final determination not to abate such interest.”(emphasis added)

The case provides the background on Section 6404(h):

When enacted in 1996 as part of the Taxpayer Bill of Rights 2 (TBOR 2), Pub. L. No. 104-168, sec. 302(a), 110 Stat. at 1457-1458 (1996) (as amended by TBOR 2 sec. 701(a) and (c)(3), 110 Stat. at 1463, 1464), then section 6404(g), now section 6404(h), for the first time gave this Court jurisdiction to review requests for abatement of interest in the case of proceedings commenced after July 30, 1996. Before the enactment of that provision, the Court generally lacked jurisdiction over issues involving interest.

IRS issued Rev. Proc. 2005-38. It provides generally that IRS views Tax Court review of interest determinations as limited to Section 6404(e) abatement claims, and not claims that interest should be suspended under Section 6404(g).

Though taxpayers made an argument that the procedure could be read differently to contemplate court review of suspension determinations, the court gave no deference to the procedure:

The court turned to the statute and its main reason for holding that the court had jurisdiction follows:

First, we agree with petitioners that all of section 6404 deals with abatement, of which suspension is a category. A claim that interest should have been suspended for a period is the logical equivalent of a claim for abatement of interest that has been assessed for that period.

The court goes on to draw on general administrative law principles—increasingly important in tax cases—that provide that there is “a strong presumption that the actions of an administrative agency are subject to judicial review.” It noted that “the use of “shall” in a statute (as in 6404(g)) suggests agency actions are susceptible to court review. Citing to general administrative law doctrine, it notes that “[h]istorically, clear indications of congressional intent to subject discretionary administrative action to judicial review have been required. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 410 (1971) (interpreting 5 U.S.C. sec. 701(a)(2), which exempts discretionary administrative action from judicial review).”

A final procedural point worth noting. IRS argued in the alternative that the administrative procedures were ongoing and that the letters it issued to the taxpayer were not a final determination. The opinion dismissed that argument, noting and referring to other authority that emphasizes the label of a document is not conclusive. The key is whether the letter embodies a determination in substance.

Parting Thoughts

I suspect that we will not see many cases involving suspension periods. The court in Corbalis itself reserved judgment on whether the suspension period provisions apply, noting that the record was incomplete on whether the suspension period is implicated in the circumstance in this case (loss carrybacks). The case is of broader significance. First, the Tax Court rightly gave the IRS revenue procedure purporting to define its jurisdiction no deference, especially when the procedure lacked a reasoned explanation. Second, advocates are well served to draw on general administrative law principles and caselaw, especially in cases that are not deficiency determinations. In the last few decades Congress has increasingly expanded the Tax Court’s jurisdiction to matters beyond deficiency cases. This past decade has seen significant developments clarifying the importance of those administrative law doctrines. Just how far some of the general administrative law principles will disrupt established tax practice is an open and very current question.

One of the reasons for little litigation in this area is a badly-drafted statute. Section 6404(h) says you can bring suit only after the IRS makes a “final determination”. The problem is that the IRS sometimes doesn’t make any determination. I represent a taxpayer who filed a Form 843 seeking section 6404(e) abatement last year. It has been more than 6 months, but we have heard nothing from the IRS. We can’t bring suit under 6404(h). The usual rule of 6532(a) that you can bring a refund suit if the IRS has not ruled in 6 months does not apply. There is a bill in the Finance Committee that would change the rule, so that if one has not heard from the IRS one way or the other in 180 days, suit may be brought. The proposed amendment, as written, would only apply to abatement requests made after the date of enactment, which would not help my taxpayer. I have written to Finance and asked that the proposed provision be made retroactive. If anyone else is in the situation of my taxpayer, I would urge you also to write to Finance and make a similar comment.

There is at least one issue lurking in 6404(g) that may get litigated at some point — and now possibly in the Tax Court. Under 6404(g), interest is suspended until the IRS “provide[s] a notice to the taxpayer specifically stating the taxpayer’s liability and the basis for the liability”. Under Reg. 301-6404-4(a)(7)(ii), in the case of a TEFRA partner, the 60-day letter or FPAA sent to the TMP is usually considered the triggering notice, even though a taxpayer doesn’t really know how much to pay until he or she gets a computational adjustment notice many years later. The reg. section reads:

“(ii) Tax attributable to TEFRA partnership items. Notice to the partner or the tax matters partner (TMP) of a partnership subject to the unified audit and litigation procedures of subchapter C of chapter 63 of subtitle F of the Internal Revenue Code (TEFRA partnership procedures) that provides specific information about the basis for the adjustments to partnership items is sufficient notice if a partner could reasonably compute the specific tax attributable to the partnership item based on the proposed adjustments as applied to the partner’s individual tax situation. Documents provided by the IRS during a TEFRA partnership proceeding that may contain information sufficient to satisfy the notice requirements include, but are not limited to, a Notice of Final Partnership Administrative Adjustment (FPAA); examination reports (for example, Form 4605-A or Form 886-A); or a letter that allows the partners an opportunity for review in the Office of Appeals (60-day letter).”

I am on the fence about whether this reg. is valid. By contrast, the IRS has taken the opposite position as to the critical notice in TEFRA with respect to corporate “hot interest” under 6221(c). Where deficiency procedures apply, hot interest starts 30 days after the earlier of the date of the SND or “the date on which the 1st letter of proposed deficiency which allows the taxpayer an opportunity for administrative review in the Internal Revenue Service Office of Appeals is sent”. 6621(c)(2)(B)(i) provides a special rule for situations (like TEFRA) where the deficiency procedures do not apply. It provides:

“(i) Nondeficiency procedures. In the case of any underpayment of any tax imposed by this title to which the deficiency procedures do not apply, subparagraph (A) shall be applied by taking into account any letter or notice provided by the Secretary which notifies the taxpayer of the assessment or proposed assessment of the tax.”

Reg. 301.6621-3(c)(4) provides, essentially, that the computational adjustment notice (which is sent at the time of the notice of assessment) is the triggering date for hot interest, not the FPAA or 60-day letter. The reg. reads:

“(4) Partnership items. For purposes of section 6621(c) and this paragraph (c), 60-day letters and the notices described in sections 6223(a)(1) and 6223(a)(2) (relating to administrative proceedings at the partnership level) are not treated as letters of proposed deficiency that allow the taxpayer an opportunity for administrative review in the Service’s Office of Appeals, deficiency notices under section 6212 of the Internal Revenue Code, or letters or notices that notify the taxpayer of an assessment or proposed assessment of the tax. Thus, in the absence of any other letter or notice described in paragraph (c)(2) or (c)(3) of this section that establishes an earlier applicable date, the applicable date in the case of any underpayment of a tax attributable, in whole or in part, to a partnership item (as defined in section 6231(a)(3)) is the 30th day after the date on which the Service sends the first letter or notice that notifies the taxpayer of an assessment of the tax.”

I admit that 6404(g) refers to the critical notice in slightly different language from 6621(c), but the purpose of the two statutes seems the same — interest starts to be chargeable by the IRS at all (under 6404(g)) or at a higher rate (under 6621(c)) after the taxpayer gets a notice that alerts the taxpayer to the exact amount to be paid. So, why the different result under TEFRA under the two regulations? Can they both be held to be “reasonable” interpretations under Chevron Step 2?

Anyone who decides to litigate an interest issue by a TEFRA partner who gets a 6404(g) notice that starts charging interest after the 60-day letter (and not the computational adjustment), please let me know. I’d like to know if a reg. challenge is being made (in the Tax Court, now, or elsewhere). I was one of the people who submitted a comment when the 6621(c) reg. was in proposed form, urging the result adopted in that reg. for TEFRA. I don’t see why the Service adopted the opposite rule for TEFRA in the later reg. under 6404(g).

I had not considered the different treatment under the hot interest rules; I agree that the different starting date for the abatement provisions at first blush is puzzling. While I have not thought deeply about this, I guess I might take issue with the statement that the “purpose of the statute seems the same.” I have not looked at the OBRA leg history under 6621 but I think of hot interest as more in the nature of a penalty even though styled as interest. If you view it that way, the different starting point seems more reasonable.

Mr. Smith, I’m just speculating, but I wonder if you can get any relief under general administrative law principles, post-Mayo, that say that unreasonable delay in making a final determination allows going to the courts before it.

A clarification of the statute: When I saw “beginning on the later of (i) the date on which the return is filed; or (ii) the due date of the return without regard to extensions. ” I read it wrong and thought that if the taxpayer never filed, the due date of the return would govern, but it does not. If you don’t file, then there’s no automatic interest abatement.

The point comes up in a 5th circuit case, US v. Marshall, on interest payments that I have an amicus brief in on (see : http://ssrn.com/abstract=2261914) . The Marshall Estate owed gift tax, but didn’t file a return. The government then went after the donees, as it is permitted. By that time (13 years later) the interest had piled up. It isn’t clear to me that the donees actually had any obligation to file a gift tax return, since it is normally OK to assume the donor will pay it. But I guess the fact that the Estate never filed a return means the interest isn’t abated, even though the IRS didn’t contact the donees till very late.

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Leslie Book

Keith Fogg

T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…

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